Monday, November 26, 2012

It occurs to me that all the signs of Congressional Republican reasonableness on the budget negotiations that I celebrated in my prior post might represent a clever strategy on the opposition's part. (In addition to Senator Chambliss, we now hear similar statements disavowing pledges never to raise taxes from the likes of Senators Graham, Coburn, and Corker, and from Senator-elect Flake.) Not that these statements don't still call for celebration--they do. Any weakening of the hold that the unelected tax czar Grover Norquist has over Congress deserves all the praise it can get.

But as Jed Lewison pointed out in a post on Daily Kos, Congressional Republicans don't even need to violate the Norquist pledge in order to increase revenues. Under current law, the Bush tax cuts expire all by themselves at the end of the year. If Congress does nothing, income tax rates will automatically go up for everyone. So why all the public demonstrations of a willingness to break the pledge? Could all these pledge-breakers be throwing Grover Norquist under the bus to achieve some larger purpose?

Because Democrats are willing to extend the Bush tax cuts for income under $250,000, what is actually on the table now is a Democratic proposal to LOWER tax rates for everyone. But Republicans are balking at agreeing to extend the Bush tax cuts on those income levels unless Democrats also agree to extend the 35% tax rate on earned income above $250,000. That means that Republican expressions of reasonableness about revenues are to some extent a ruse. Those Republicans who publicly embrace the need to increase revenues have yet to express any willingness to restore higher income tax RATES for anyone. All they are talking about so far are limitations on deductions.

What's the difference, so long as we get some more money into the Treasury to help pay the bills? It's a big difference. The tax and budget talks going on now in Washington are merely the latest battle in an ideological struggle that goes back decades. It's an article of faith among Republicans that the most important thing we should try to achieve in the tax code is to keep rates as low as possible; and also to reduce the progressivity of the Code. Low rates, according to this theory, represent a reduction in government interference in peoples' economic decisions. And lessening progressivity represents a retreat from government attempts to re-distribute income. Republicans have at times been willing to allow the elimination of popular tax deductions, and also to allow payroll taxes to increase, in exchange for agreements to keep top marginal rates low, and thereby satisfy these ideological desires. Democrats, on the other hand, have generally favored more progressivity and higher top marginal rates, because they want to expand the social safety net and reduce economic inequality.

On the whole, Republicans have been winning the war over high tax rates, as over the years, rates and progressivity have been steadily ratcheted down, from a 90% top bracket during the Eisenhower years, to 70% in the 1970s, to 50% under Reagan, and 35% under George W. Bush. (It's no coincidence that over the same period, the disparity between rich and poor has reached levels not seen since the 1920's.) The Obama administration has been fighting hard to restore the 39% top rate that Bill Clinton achieved in the 1990's over fierce Republican opposition, opposition that has only increased during the last few years. (I might add that Republican opposition to the 39% top marginal tax rate has cost the Republicans a great deal politically--it was a factor in the 2012 election--since a solid majority of the public favors restoring the 39% top rate for high earners. Despite the heavy price they are paying, Republicans cling to the 35% top marginal income tax rate like nothing else.)

But last year's budget agreement was engineered to make it almost inevitable that the 39% top tax bracket would be restored if Obama were re-elected. Both sides knew that at the time, and Republicans agreed to the deal because they were hoping to win the 2012 election. But now Democrats show no signs of weakening on this point. Really, why should they? They won the election. That means what we are seeing are the last ditch efforts of the Republican opposition to forestall the inevitable. In the course of this battle, all kinds of surprising things might happen, like the willingness of the Republican opposition to break pledges and put anything on the table. The last thing the opposition will give on will be the thing they hate the most, which is to allow top marginal tax rates to creep back up again. We will get right to the edge of the so-called fiscal cliff, and may tumble over it, before that will happen.

3 comments:

If you were the mediator, what would you suggest as spending cuts as fair compromise from the Dems if the Repubs agree to raising marginal tax rates to a high of 39% and eliminating proposed deductions?

The simple answer is that if I were the mediator, what I would suggest would be whatever I thought both sides would agree to. There is a danger for a mediator in suggesting things that I might think are fair, because then the mediator gets invested in his own ideas and starts acting like an advocate for them. Much better to figure out what is important to both sides, what they want, and what they can give up without harming their principles.

In this kind of negotiation it's not just a matter of satisfying both sides' interests. There are also political power struggles going on. For example, the Republicans really want to say that they took some bites out of Obamacare, since they have been campaigning for three years on how terrible it is. And there are probably some cuts in that program that Democrats could agree to without harming its essential features. So in that way the Democrats might be able to give something up that might not cost them too much but would be enormously valuable to the Republicans. And both sides win that way, because the Republicans will be able to brag about getting rid of some terrible feature of Obamacare, and the Democrats would be able to brag about giving up something dear to their hearts in the interest of doing something about the deficit. There are parts of Medicare you could do the same with, but Medicare is much more of a hot potato.

The tax rate issue is even more difficult, because it is such an easy number to measure. There are Republicans who want to fight to the death for 35, and there are Democrats who want to fight to the death for 39. The actual number may be less important than the ability to point to the number and show which side won and which side lost. If it was just about the dollars, it would be easily negotiated.

It occured to me that the process of negotiation in this case is heavily tilted toward scoring political points. As you say, removing parts of Obamacare won't change much. As well, including tax hikes on the wealthy and closing some tax deductions would satisfy some Dems but it would only amount to a relatively small number compared to yearly debt. What I fear is that if a deal is struck it will lite on results.

I am less interested in political points and more interested on policy results. I would be willing to make less money and pay more taxes right now; as well as wait more time (say to age 67) to qualify for Medicare, if I thought my future over the next 25 years (if I live that long) and the future of my kids and their kids looked brighter. I am not part of the rich. My combined income with my wife is far less than six figures. Everyone should be a part of the solution; everyone needs to contribute with some sacrifice; not just those making over $250,000.

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